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# Calculate the Initial Investment for a Replacement Machine

Edwards Manufacturing Company is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of \$10,000. The firm is depreciating the machine under MACRS, using 5-year recovery period. (See Table 3.2 on page 100 for the applicable depreciation percentage.) The new machine cost \$24,000 and requires \$2,000 in installation cost. The firm is subject to a 40% tax rate on both ordinary income and capital gains. In each of the following cases, calculate the initial investment for the replacement.

a. EMC sells the old machine for \$11,000.
b. EMC sells the old machine for \$7,000.
c. EMC sells the old machine for \$2,900.
d. EMC sells the old machine for \$1,500.

#### Solution Preview

a. EMC sells the old machine for \$11,000. \$18,248
b. EMC sells the old machine for \$7,000. \$16,648
c. EMC sells the old machine for \$2,900. \$15,008
d. EMC sells the old machine for \$1,500. \$14,448

a. b. c. d.

Selling price \$11,000 \$ 7,000 \$ 2,900 \$ 1,500
Cost ...

#### Solution Summary

This solution illustrates how to calculate the initial investment for a replacement machine.

\$2.19